EUR/GBP continues to fall after BoE left interest rate unchanged

• EUR/GBP falls following BoE’s decision to keep interest rates unchanged.
• There was speculation that he might cut rates, which would have weakened the Lira.
• The euro maintains support after comments and data showing a widening current account surplus.

EUR/GBP is trading lower in the 0.8390s on Thursday as it extends its breakout from the shallow channel it has been rising in since late August.

The pair is trading a quarter of a percent lower on the day as the British pound (GBP) strengthens against the euro (EUR). Sterling is broadly up after the Bank of England (BoE) voted by an eight-to-one majority to keep interest rates unchanged at 5.00%. Only one member voted for a 0.25% reduction. Sterling is seen gaining as relatively higher interest rates attract foreign investors resulting in higher capital inflows.

The BoE also announced that it will reduce its stock of gilts (UK government bonds) by £100 billion between October 2024 and September 2025. This suggests that it will not be buying gilts to replenish its existing stocks when they mature. This, in turn, will likely lead to a fall in gold prices but an increase in gold yields. Higher yields tend to support sterling but weigh on EUR/GBP.

The euro, meanwhile, is also finding support due to dovish comments from European Central Bank (ECB) executive board member Isabel Schnabel, who said “steady services inflation is keeping headline inflation high.” Her comments suggest the ECB will not cut interest rates aggressively as inflation remains high. However, she also added that “inflation projections over the medium term have often clustered around the 2% target” and that “wage growth is expected to moderate as past price shocks subside “.

Schnabel’s comments differed from those of European Central Bank (ECB) Board of Governors member and Bank of France President François Villeroy de Galhau, who confirmed more cuts were underway on Wednesday, saying “it is likely that the ECB will continue to reduce rates. “

The data showed that the euro zone posted a larger-than-expected current account surplus on Thursday. The eurozone’s current account widened sharply to €48 billion in July 2024 from €25.5 billion a year earlier. A consistent surplus is a positive factor for a currency because it shows that the foreign demand for the currency to buy exports and services exceeds the demand for foreign currency to buy imported goods and services.

EUR/GBP fell on Wednesday after core UK inflation data came out higher, beating estimates, while euro zone inflation was revised down. Relatively higher inflation supported the pound as it indicates interest rates will remain relatively higher for longer.

The UK’s core consumer price index (CPI) rose more than expected, posting a 3.6% increase from last year in August. That was well above July’s 3.3% and the 3.5% expected. In addition, services inflation also increased.

The euro, meanwhile, saw slight weakness after the eurozone’s gauge of inflation, the Harmonized Index of Consumer Prices (HICP), was revised down to 0.1% month-on-month in August from a flash estimate of 0, 2%, when no change was expected.